DAILY NEWS Jun 12, 2014 5:21 PM - 0 comments

Kaminak's PEA at Coffee could be the start of something big

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2014-06-12

VANCOUVER — For Kaminak Gold (TSXV: KAM, US-OTC: KMKGF) the release of a long-awaited preliminary economic assessment (PEA) at its Coffee gold project — located 130 km south of Dawson City, Yukon — is just a beginning. The report marks a promising step in defining what president and CEO Eira Thomas labels a “potential new gold district,” with the oxide nature and high grade of Coffee’s mineralization offering a preview of the project's potential long-term economic returns.

Kaminak had a big year in 2013 as it worked to drill off additional resources at Coffee and nail down its metallurgical testwork. The company brought Fred Lightner — a metallurgical engineer with 33 years of experience in heap-leach gold mining — aboard as its director of mine development and completed 302 holes over 55,500 metres.

By the end of the year Kaminak had bumped Coffee's global oxide resources to around 8.6 million indicated tonnes grading 1.75 grams gold per tonne for 480,000 contained oz., and 50.4 million inferred tonnes averaging 1.28 grams gold for 2.1 million contained oz. The company also reported column-leach gold recoveries of between 90% and 92% on oxide material from its Latte and Supremo zones.

The culmination of Kaminak's work was a PEA that models a relatively large heap-leach gold operation that would run at 5 million tonnes per year. Coffee carries development costs of around $305 million and would produce an average of 167,000 oz. of gold annually over an 11 year life at all-in sustaining costs of $688 per oz.

"What underpins our strategy is that the deposits are completely open along strike and to depth. We opted not to start small and stretch the mine life out to fifteen or twenty years because we know we're going to be adding additional resources sooner rather than later," Thomas explains during an interview at Kaminak's Vancouver offices.

"We actually went into the process looking at different development options due to the mood of the market and emphasis on lower capital costs. So we started thinking smaller in scale, but very quickly determined it wasn't a small project, and we'd optimize the economics by going bigger. That doesn't preclude us from going back and looking at smaller scale opportunity if the market continues to be challenging," she adds.

Kaminak zeroed in on around 53.4 million tonnes of oxide material at an average grade of 1.23 grams gold for around 1.9 million recoverable oz., with Coffee's strip ratio pegged at 4 to 1. Lightner explains that early in the process it became evident the project would really benefit from economies of scale, which led to very competitive all-in sustaining cash costs.

In addition the company would be spending around $109 million on infrastructure to support the mine — including a 250-km all-season access road and a diesel power plant — so a larger operation made sense in terms of revenue and payback.

And Kaminak appears to have met its goal with an after-tax payback period of just two years. Coffee is scheduled to produce 231,000 oz. of gold in just its first year of commercial operation, while overall the project would generate gross revenue of $2.4 billion and operating cash flow of $1.24 billion.

“The mine will actually start in the Latte deposit because it’s the closest to where we think the heap leach facility will be located. It also has the lowest strip ratio so it's a good starting point for getting the mine up and going. Then we move into the Double Double deposit, which is much higher grade, but is also a higher strip ratio,” Lightner adds. “So for the first two years we're seeing significantly higher grades than average, which gives us that big flush of production in the early years. We knew due to our location and capital costs we'd need to generate enough revenue to get a strong payback.”

At US$1,250 per oz. gold Coffee's heap-leach operation would carry a $330 million after-tax net present value (NPV) at a 5% discount rate and an internal rate of return (IRR) of 26%. Assuming gold jumps to US$1,400 per oz. the project features a $465 million NPV and an IRR of 33%. Sustaining costs total around $146 million, while life-of-mine processing costs are pegged at $6.67 per tonne leached.

The base case assumes an owner-operated, open-pit mine with a three-stage crushing circuit, a valley fill heap leach facility, and a carbon adsorption gold recovery plant to produce gold doré.

"Obviously managing risk is absolutely critical. For us capital couldn't get out of control, it needed to be a project we could build ourselves," Thomas continues. “It was really a balancing act, and that's how the PEA evolved to become a little larger than we initially anticipated. We believe it took us down the lowest-risk path, and our message is that we tried to put something on the table that is doable. We're not reaching here, as we think it's a conservative study that has a lot of room for optimization and improvement."

And a big part of Kaminak's value proposition moving forward is Coffee's extensive growth potential. Vice-president of exploration Tim Smith has around $3 million this year to chase more than 20 km of priority gold-in-soil anomalies outside of the current resource area. He says pending positive results he'll likely ask the board for even more exploration money.

Smith and his team will continue to target near-surface oxide ounces that could extend Coffee's eventual mine life, and reiterates it's important the market understand that the PEA is just "a snapshot of the economics of [the project] at the present time, but it will continue to grow."

Priority targets include: the Cappucino zone, where a large 2 km by 650 metre anomaly returned a high of 26.5 grams gold-in-soils over 4.6 metres; the Arabica gold-in-soil anomaly — located 1.2 km east of the Supremo T7 zone — where maiden drilling cut 11 metres of 3.4 grams gold in 2013; the Americano zone, where ten widely-spaced holes all intersected gold mineralization in 2010; and the Espresso zone, which hosts an untested 2km x 800m gold-in-soil anomaly located roughly 1.5 kilometers southeast of the Kona zone.

“We want to hit some of the peripheral targets defined by high-grade, gold-in-soil anomalies. For example Capuccino has returned the highest-grade soil samples ever at Coffee, and we'll have the drill out there shortly,” Smith explains. “We have big, broad and consistent geochemical anomalies to the north of the resource with absolutely no drilling to date. Large portions of the project are significantly under-drilled considering the acreage. At Kona we've drilled around 300 metres of strike, while the soil anomaly is one km long.”

Kaminak rose roughly 27% or 18¢ on 1.6 million share trade volumes during the two days following its announcement of Coffee's PEA en route to an 86¢ per share close at the time of writing.

The company reported working capital of $16.5 million at the end of March after it closed an $11.5 million private placement wherein it issued 14 million units at a price of 82¢ per unit. Kaminak has traded within a 52-week window of 46¢ and $1.05, and maintains 93.4 million shares outstanding for an $80.3 million press-time market capitalization.

“At this stage we think the way to [add value] is to build a team and build the mine and use it as a foundation for growth," Thomas concludes. "That doesn't mean we aren’t talking with other companies about the project. There is a high level of interest in Coffee, and I think that interest will increase now we've released the PEA. We believe we have a whole new gold district. Each and every target represents potential discoveries that could contribute ounces into a feasibility study. This isn't ten years down the road; we're drilling targets we think could meaningfully impact economics today.”